Amazon.com, Inc. (NASDAQ:AMZN) stock has taken a bit of a beating since the company’s earnings report last month. However, the post-earnings selloff has created an opportunity in AMZN stock that the bulls simply cannot ignore anymore.
Before we dive into this trading opportunity, it’s important to realize something about Amazon’s earnings. See, shares sold off because the e-commerce giant’s second-quarter earnings fell well short of Wall Street’s targets; Amazon earned 40 cents per share versus expectations for $1.42. Traders saw this extraordinarily wide miss, and ignored the fact that both revenue and Amazon Web Services (AWS) revenue beat the Street’s views.
This may seem trivial to many investors, especially when they are used to dealing with more traditional business models. After all, an earnings miss is an earnings miss, right?
Not when it’s Amazon. Investors who have followed the company for any length of time know that AMZN is more than happy to cannibalize its bottom-line for top-line growth and market share expansion.
In short, Amazon will spend at nearly uncomfortable levels in order to ensure continued market expansion, and market diversification — just look at the Whole Foods Market, Inc. (NASDAQ:WFM) deal and the rapid expansion and rollout of the Kindle and Echo.
Technicals and Options
Viewing Amazon’s second-quarter results in those terms, last quarter was a considerable success for the company. What’s more, the negative reaction in AMZN stock has shaken out the speculative and weaker hands, and this should allow the stock to once again resume its longer-term uptrend.
Click to EnlargeTechnically speaking, Amazon is in the process of rebounding off support in the $950 region. Adding to the positive bias is the fact that shares are hovering on the verge of oversold territory, making them quite attractive to bargain hunters — especially those familiar with Amazon’s fundamentals.
Supporting this rebound is the fact that Wall Street analysts did not waver in their bullish assessment of AMZN stock following earnings. In fact, 39 of the 44 analysts following Amazon rate the shares a “buy” or better, according to Thomson/First Call, with a 12-month consensus price target of $1,140.39. That’s a fair amount of upside from Amazon’s current perch.
Checking in with September’s options for Amazon, we find a fair amount of lingering caution in the wake of the recent selloff. The September put/call open interest ratio rests at a bearish leaning reading of 1.21, with puts outnumbering calls among back-month options.
Given the stock’s weak price action, this is understandable, but it also indicates that there is a reasonable degree of sideline money that could be brought to bear on AMZN stock as the shares rebound from technical support.
Overall, September implieds are pricing in a potential move of about 5.5% heading into expiration. This places the upper bound at $1,023 and the lower bound near $916. Short-term support should hold firm at $950 baring any major broad market movements, with a more solid floor holding near $900. On the upside, a test and breakout above $1,000 could certainly be in the cards.
2 Trades for AMZN Stock
Call Spread: Traders looking to bet on a continued rebound for an undervalued Amazon might want to consider a Sept $990/$1,000 bull call spread.
At last check, this spread was offered at $3.27, or $327 per pair of contracts. Breakeven lies at $993.27, while a maximum profit of $6.37, or $637 per pair of contracts — a 105% return — is possible if AMZN stock closes at or above $1,000 when September options expire.
Put Sell: For a more conservative play, a Sept $900 put sell should close out of the money.
At last check, the Sept $900 put was bid at $6.02, or $602 per contract. As with all put sells, traders will keep the premium received for entering the trade as long as Amazon stock trades above $900 through Sept expiration. If AMZN were to trade below $900 prior to expiration, then you could be assigned 100 shares per contract sold at a cost of $900 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
